Encana is building a war chest – but for what?
The company has built up almost $7 billion in cash. How, and where, will it get spent?
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at firstname.lastname@example.org
by Max Fawcett
At the end of the trading day on Monday, Encana (TSE:ECA) announced that it was selling off its remaining stake in PrairieSky Royalty (TSE:PSK), the company that it spun off just a few months ago. In exchange for its 70.2 million shares, which constituted a 54 per cent stake in the new company, it received $2.56 billion in cash. “A strong PrairieSky price, and increasing fears of a weakening market for energy issues across the board, likely prompted Encana to strike while the iron was hot,” the Globe and Mail’s Jeffrey Jones surmised in a piece yesterday. As is stands, the company now has nearly $7 billion in cash in its kitty. And while it’s possible that the company could use it to buy back its own shares (which are, according to FirstEnergy’s Michael Dunn, undervalued by around 30 per cent based on his US$29 price target for them) or issue a special dividend, Canaccord’s Phil Skolnick think it’s more likely the company will plow the payola into its operations.
One possible option, according to a research note Skolnick wrote yesterday, is partnering with Athabasca Oil (TSE:ATH) on its Duvernay lands. “Mr. Skolnick said Encana’s moves could prove positive for Athabasca Oil, which has been seeking a partner for its extensive lands in the Duvernay and recently bolstered its financial position by finalizing the $1.18-billion sale of its interest in the Dover oil sands project to PetroChina following months of uncertainty,” Jones wrote. Another option is putting it to work in a new core area. “Oil-rich operating areas where Encana currently is absent but may have designs include the Permian Basin that straddles Texas and New Mexico and the Bakken in North Dakota,” Jones wrote in his piece, “though analysts caution that prices for assets in such regions are high and opportunities scarce.”
And speaking of Athabasca Oil, the company announced that CEO Sveinung Svarte would be stepping down shortly, with Tom Buchanan – former CEO of Charger Energy and Spyglass Resources – would come in as his replacement. In addition, the company tacked $53 million onto its 2015 capital spending budget for its Duvernay properties, where it continues to look for a partner. “Athabasca plans to start development drilling at the Duvernay in mid-September this year,” FirstEnergy’s Michael Dunn wrote, “focusing on the Simonette, Saxon and Kaybob West areas, where it has seen its best Duvernay well results. Pad drilling will commence in 2015 and Athabasca will target $10 to $15 million per well. The company plans to run four rigs [in the second half of 2014 and into 2015], with plans to eventually increase the number of rigs to six thereafter.” He has a $9.50 target on its shares.